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Smart phone smackdown


    August 11, 2007  


It's clear Apple Inc. prides itself on cornering a "hip" market. Take its most recent ad campaigns: To sell iPods, it enlisted mega-celebrities such as Paul McCartney and indie-hipsters The Fratellis. In its popular computer commercials, it chose Justin Long - a hot young actor with just the right amount of geek - to embody the brand. He's pitted against portly John Hodgman in the part of PC, playing a stodgy, dry, business-minded and downright boring incarnation of a Microsoft-driven computer.

Apple may have found an easy target in PCs, but with the introduction of the iPhone at the end of June, it is going up against a different kind of competitor: Waterloo's Research In Motion, and its ubiquitous BlackBerry phone.

Playing the "hip" card may not take Apple so far this time: RIM users are fiercely loyal, and not as likely to be out-cooled by some hipster in the perfect hoodie.

There's plenty at stake, with more than 1.1 billion cellphones introduced to the market each year. There are currently an estimated three billion subscribers using the devices around the world. With regular cellphones, users are charged for the amount of time they spend talking. With smart phones, carriers are able to charge for much more, such as music and video downloads and text messaging.

"Smart phone usage is driving the emerging mobile Web," market research firm M:Metrics says in its most recent report.

"More than one-third of smart phone browsers are using the Web almost every day. Smart phone users drive a disproportional share of revenue for mobile operators and content providers."

The newfound rivalry poses an intriguing choice for investors trying to pick a long-term winner. Analysts fall all over themselves to say how well both companies will perform in the short term.

Look 10 years down the road, however, and the view is not so clear.

"The outlook for any company operating in the IT sector is especially murky," said Kevin Restivo, an analyst with Seaboard Group who specializes in telecommunications. "It has always been volatile, because of the pace of change.

"It's impossible for either of those companies - it's not even in the realm of possibility - to leave things the way they are."

"A billion-dollar market can support a lot of competition," added Morgan Keegan analyst Tavis McCourt.

"It's a big market, and anyone can push in."

So how does an investor decide which company deserves their investment dollar? It's unlikely the two company's chief executive officers would agree to an arm wrestle, or a few rounds in the ring.

But there's no doubt both camps have been sizing each other up, looking for any chance to land a knockout punch.



The perceived beauty of the iPhone, according to early reviews, is its ease of use and its multiple functions.

It uses Apple's operating system, which means iPod and Mac computer owners will feel comfortable right away. The touch screen makes accessing music, photos and digital files as easy as dragging a finger across the screen.

Also key is its ability to switch to and from traditional mobile networks to wireless networks, allowing for rapid downloads and easy access to multimedia files. It's also pricey, and at $599 (U.S.) it may be beyond the reach of many consumers. But for those who do pay the hefty entry fee, there are also accessories that will add to Apple's bottom line, such as wireless headsets that run for $129.

Mark Donovan, a senior analyst at M:Metrics, said users typically upgrade their phones every 18 months. Upgrading to more sophisticated phones will be important for Apple, he said. "If two years ago we were talking, we'd talk about how smart phones are only occupying the high end of the market.

"But now, phones are going to become the default way to access your digital lifestyle. It's going to be about driving revenue through new types of users."


While Apple is thrusting itself on the market with one incredibly hyped device, RIM is armed with an assortment of high-tech weaponry. Counting past devices, 26 different BlackBerrys have been on the market. Most business types are familiar with its standard e-mail devices, such as the 7520 model, but it's the company's newer smart phones that will line up directly against the iPhone.

The Blackberry Curve is the smallest device offered with a full keyboard. It has a camera, a map reader, media player modem and a trackball. Geared toward the high-end personal user, it runs at about $350 (Canadian). For those wanting to spend a little bit less, the Pearl is a similar device without a full keyboard, priced at about $200.

Last month, the company announced its 8820 Smartphone, to be released this year. Seen by many as the company's direct response to the iPhone, it also offers users the ability to switch from cellphone networks to wireless networks, which saves on data costs. It also offers a built-in GPS device, and a multimedia function to store music and watch videos.



With cellphones increasingly looking more like mobile computers, many said it was inevitable Apple would combine its popular iPod devices with the knowledge it has gained over two decades building Mac computers to produce some sort of uber-device. With the iPhone, the company looks to offer a gadget that can trump all others.

There's debate among market watchers about whether the company is offering a phone or a computer - with many agreeing the answer is somewhere in the middle.

"The important thing is Apple has brought in the distinct possibility of a new niche in the market," said analyst Brian Platts of Michael Sone Associates.


Having conquered the business world, RIM's new smart phone models show a shift in focus from the business user to the personal consumer. Indeed, its reputation as the world's most secure wireless e-mail provider will help get more devices into more hands.

But with a billion new handsets being purchased each year, RIM no doubt sees the need to tap the personal user. The company has worked at developing its brand overseas and ensuring that it has partners around the globe to get its devices into the right hands.

"The BlackBerry is the benchmark for wireless e-mail," said Mr. Restivo from Seaboard. "There's no two ways about it, there really hasn't been smart phone competition in North America to this point."



While Macs and iPods have proliferated around the world, the iPhone is exclusively an American offering. With AT&T as its only carrier, the phone is available for purchase only at its retail outlets and Apple's own stores.

This lack of global reach has many wondering whether Apple is driving consumers straight into the arms of RIM, whose devices can be found in many corners of the globe. But with plans to slowly introduce the iPhone internationally in the coming year, some say the market is ripe.

"Apple has plenty of opportunity to penetrate markets globally, not just in computing but in music and telephones," said Mike Abramsky of RBC Dominion Securities.


RIM CEO Jim Balsillie was well-quoted when he suggested the hype surrounding the iPhone launch would actually mean more business for RIM. His message was simple: Apple was launching in one country, on one network. RIM has agreements with 300 different carriers.

The company has also signed a flurry of deals with retailers around the world. New partner Carphone Warehouse, for example, is the largest independent mobile phone retailer in Europe with 2,100 stores in 10 countries. Another deal will see more than 200 Sam's Club outlets in the United States stock its shelves with BlackBerrys.

"Awareness of Blackberry is developing on a new level globally, gaining mindshare more than ever before," Mr. Ambramsky said.



Apple is famously led by Steve Jobs, who left the company in the 1980s before returning to lead it to its present heights. A personality-driven company, analysts have long suggested that product concepts come from the top down. To some, this presents a long-term investment risk that needs to be considered.

"Jobs is kind of the face of the company, and there's nothing wrong with that," said Shaw Wu, an analyst with Ameritech. "Not all of the ideas come from Jobs, but there is a perception that they do. Talking five to 10 years out, that could be very critical to the company."


RIM splits its chief executive duties between Mr. Balsillie - a sports enthusiast from Peterborough, Ont., who pursues NHL teams in his spare time - and company founder Mike Lazaridis, an officer of the Order of Canada.

"I think the most important thing is the opportunity in the market and their ability to seize the opportunity through strength in management and in technology," Mr. Ambramsky said. "Management has demonstrated it's very good at making BlackBerry devices and time and time again has demonstrated it can innovate faster and get into the more valuable end of the market."



Apple has never been a company to shy away from cool. It enlisted Bono as its front man, and hip new bands dominate its psychedelic iTunes commercials.

But being known as the company with cool products has its down side, Mr. Wu said.

"The challenge of being a company that has done so well is just keeping up with the technology and being able to constantly deliver," he said. "They are under constant pressure to produce these products."


Business users have become accustomed to having RIM's devices attached at the hip, and a wider range of consumers are now starting to get in on the action. The company has won the world's loyalty with its reliability and secure network, and its best bet is to hang on to its reputation. "Over the last several years the coolness-factor window is getting smaller and smaller," said Mr. Platts from Michael Sone. "What is the have-to-have device today is already old-hat six months down the road. Even three months down the road."



When it comes to making money, the iPhone barely factors into Apple's present finances. The company gave a hint of how things were going last month, when it said it moved 270,000 phones in the first two days of sales. Analysts predict that as many as 16.5 million phones could be sold by 2009.

For now, though, Apple is still at its heart a computer company, with sales worth more than $2-billion in its last quarter. "In spite of all the hype and momentum behind Apple, it is important to remember they still have a tiny share in two markets, phones and computers," said John Lynch from Needham and Co. "They have plenty of room to grow in the absence of new product categories, provided they continue to win converts."


RIM may pull in most of its money from hardware sales, but it is looking to diversify its earnings. Anyone who owns a Microsoft Windows mobile device can have it mimic a BlackBerry through a Web download. It has been offering similar software to its largest competitors, such as Palm Inc. and Nokia Corp. Seventy-six per cent of its $1.08-billion in revenue last quarter came from device sales, while 16 per cent came from services and 5 per cent came from software sales.

"RIM has put in place everything it needs for the long term," said Canaccord Adams managing director Peter Misek. "It's the most efficient technology right now for wireless applications. There is nothing else that comes close, they are in fantastic shape."



Apple is definitely at the top looking down when it comes to size. With a market capitalization of $118-billion (U.S.) and 17,000 employees, it can crank out products. Last quarter, the company flabbergasted analysts with profit of $818-million.

"Over the next 18 months, we think it is a good investment even at these levels," said Mr. Wu of Ameritech. "We especially like it on pullbacks, since a lot of these sort of stocks don't trade straight up or down."


RIM's market cap of $43-billion may not sound as impressive up against Apple's figures, but its new products and a focus on international markets saw the company post a blockbuster $223.2-million quarter.

"Right after we set our earnings goal, the stock began to move steadily and we got a little worried as it was pushing the target," said Pablo Perez Fernandez from Global Crown Capital. "We keep raising the target, and then thinking we are getting carried away with our expectations. But they are actually earning their valuation with their performance."

Apple Inc.


Yesterday's close: $125.00 U.S., down $1.39


Research In Motion


Yesterday's close: $218.32, down $10.18



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